NATIONAL INCOME

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National IncomeThe sum total of the values of all goods and

services produced in a year

It is the money value of the flow of goods and services available in an economy in a year

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National IncomeNational Income Committee of India 1951

defines National Income as follows:

“ A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication.”

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National IncomeIt refers to the money value of the flow of goods

and services available annually in an economy.Marshall’s Definition:“The labour and capital resources of a country

acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds…. This is the true net annual income or revenue of the country or the national dividend.”

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National IncomeNational Income refers to-The income of a country

to a specified period of time, say a yearincludes all types of goods and serviceswhich have an exchange valuecounting each one of them only once

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National IncomeDouble countingIf steel has been evaluated in industrial

production, it should not be included while calculating the value of steel products, viz, machines and motor cars.

To avoid double counting or multiple counting, two methods are used

Final products methodValue added method

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National IncomeFinal Products method:Adding the value of final products only

Value added method:Go on adding the values created at each

stage in the manufacture of a commodityThen all such values created are added up

together to arrive at the national income of the country

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National Income conceptsThe following are the concepts of national

incomeGross National Product – GNPNet National Product – NNPPersonal Income – PIPer capita Income – PCI

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National Income conceptsGross National ProductNational Income is the sum total of values of

all goods and services produced during a yearThe money value of this total output is known

as Gross National Product – GNP

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National Income conceptsGross National ProductExample:If A,B,C,D,… are goods and services and If a,b,c,d,…are their prices respectivelyThe GNP is calculated as followsGNP= Axa+Bxb+Cxc+Dxd….

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National Income ConceptsGNP is most frequently used national income

concept

It is statistically a simpler concept as it takes no account of depreciation and replacement problems

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National Income conceptsNet National Product - NNP:This refers to the net production of goods and

services in a country during a yearNNP is also called National Income at Market

PricesWe get NNP, by deducting the depreciation

from GNP

Therefore NNP = GNP - Depreciation

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National Income conceptsPersonal Income - PI:Income earned by all the individuals and

institutions during a year in a countryThe entire national income does not reach

individuals and institutionsA part of it goes by way of corporate taxesUndistributed profitsSocial security contributions

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National Income conceptsPersonal Income – PIPeople sometimes get incomes without any

productive activityThey are called Transfer PaymentsExample: Unemployment benefits, old age

pensions etc.Such transfer payments are not included in

the National IncomeHowever they are added to Personal Income

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National Income conceptsPersonal Income – PI:PI is computed by using the following

formula

PI = National Income –(Corporate taxes, undistributed profits, social security contributions) + Transfer Payments

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National Income conceptsPer Capita Income – PCI:If the national income is divided by the total

population, we get per capital income

PCI = NI/Population

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National Income conceptsPer capita income PCI may be expressed either in money terms

or in real terms

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NI – Methods of computationThree methods to measure the national

incomeThey are-

Production method or Census methodIncome methodExpenditure method

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Production methodIn this methodThe total products produced in the economy

are calculated for the year and the value is added without double counting

The economy is classified into sectors likeAgricultural, industrial, fisheries, forest,

direct services and foreign transactions etcIn each sector, we can find the value of final

goods and services

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Production methodIn the international transactions, net foreign

income is calculated by subtracting the total imports from the total exports and added to the national income

The results of these sectors, when combined, gives the national income or national product

The census or product method can be expressed through the formula

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Production method O = C + I

Where O stands for output,C stands for consumption of goodsI stands for investment goods

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Income MethodAccording to this methodNet incomes of individuals and business houses

during a year are added to know the national income

Only those incomes earned and received for producing goods and for rendering services are to be counted

Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production

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Income MethodPeople get incomes in the form of Rents, wages or salaries, interest and profitThe formula is

Y = C + S

Here Y stands for Total IncomeC stands for consumption and S stands for

Savings

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Expenditure method

One man’s income is another man’s expenditure

Therefore national income can be arrived at by adding the total expenditure of individual and business firms during a year

Expenditure or outlay on final products takes place in three ways

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Expenditure method

Expenditure or outlay on final products takes place in three ways

Expenditure by consumers on goods and services

Expenditure by entrepreneurs on capital or investment goods

Expenditure by government on consumption and capital goods

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Expenditure methodThe formula for this method is

Y = C + I

Here Y stands for total expenditureC stands for consumption expenditure I stands for investment expenditure

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Difficulties in the computation of National IncomeThe following are the practical difficulties in

the measurement of national incomeThe statistics are not fully availableNon-monetized sector is dominantMost people take out their livelihood from

more than one activityIn backward economies like India,

particularly in the rural sector

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Difficulties in the computation of National IncomeIn backward economies like India,

particularly in the rural sector, the cultivators and small producers are illiterate and they do not keep books of account. This is a serious difficulty in the calculation of national income

Avoidance of double counting becomes complicated

The village money lenders maintain absolute secrecy of their transactions

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Importance of national incomeIt indicates the prosperity of a nation. Growth

in national income indicates economic prosperity

It indicates the standard of living of people of a country

It indicates the per capita income with which we can compare the levels of development of all the countries

Countries can be classified as ‘developed’ and ‘developing’ and ‘under developed’ based on their per capita income only

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Importance of national incomeNI estimates are very helpful to the Finance

Minister. It guides him to make proper and right decisions in regard to taxation and budgets

It is useful to compare the prosperity of a country at different times

It provides an instrument of economic planningIt indicates the trends of inflation and

deflation. Proper corrective action can be taken against them

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Importance of national incomeIt helps to know the progress of various

sectors in the economy. Imbalanced growth, if any, can be solved

It helps in forecasting the economic future and preplanning is possible

It indicates the economic status of a country among the nations of the world

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Trends of national income of IndiaDuring the plan periods, national income and

per capita income are increasing steadilyBut the rise in the per capita income is rather

slow due to population growthAgricultural sector is the most important

sector as it is the single largest contributor to the national income

In the recent years, the share of the government sector in national income is steadily increasing indicating the increased efficiency of the public sector

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